Ryder System, Inc. (R) Q1 2011 Earnings Report, Transcript and Summary

Good morning and welcome to Ryder System,, Inc. First Quarter 2011 Earnings Release Conference Call [Operator Instructions] Today's call is being recorded. [Operator Instructions] I now would like to introduce Mr. Bob Brunn, Vice President of Investor Relation and Public Affairs for Ryder. Mr. Brunn, you may begin.

Thanks very much. Good morning and welcome to Ryder's First Quarter 2011 Earnings Conference Call. I'd like to remind you that during this presentation you'll hear some forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. These statements are based on management current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors is contained in this morning's earnings release and in Ryder's filings with the Securities and Exchange Commission. Presenting on today's call are Greg Swienton, Chairman and Chief Financial Officer and Art Garcia Executive Vice President and Chief Financial Officer. Additionally, Robert Sanchez, President of Global Fleet Management Solutions and John Williford, President of Global Supply Chain Solutions are on the call today and available for questions following the presentation. With that let me turn it over to Greg.

Well, thank you, Bob. And good morning, everyone. Today, we'll recap our first quarter 2011 results, review the asset management areas and discuss our current outlook for the business. And after our initial remarks, we'll open up the call for questions. So let me get right into an overview of our first quarter results. And on Page 4 for those following on the PowerPoint. Net earnings per diluted share from continuing operations were $0.50 for the first quarter 2011 up from $0.24 in the prior-year period. The first quarter this year included a $0.01 charge for acquisition-related items. Therefore, excluding this charge, comparable EPS was $0.51 in the first quarter 2011 up from $0.24 in the prior year. First quarter EPS was also above our forecast range of $0.40 to $0.44. Total revenue grew 17% from the prior year reflecting recently closed acquisitions, higher fuel services revenue and organic revenue growth. Operating revenue, which excludes FMS fuel and all subcontracted transportation revenue increased 14% due to acquisitions, higher Commercial Rental activity and improved Supply Chain Solutions volumes. On Page 5, in Fleet Management, total revenue grew 11% versus the prior year. Total FMS revenue includes a 26% increase in fuel services revenue reflecting higher fuel cost pass-throughs. FMS operating revenue, which excludes fuel grew 6% mainly due to higher Commercial Rental revenue. Contractual revenue, which includes both Full Service Lease and contract maintenance was up slightly. Full Service Lease revenue increased 1%, however, this growth was largely offset by lower contract maintenance revenue. Commercial Rental revenue grew 34%. Rental revenue benefited from improving global demand, higher pricing and an increase in the fleet size. Net before tax earnings in Fleet Management were up 78%. Fleet Management earnings, as a percentage of operating revenue, increased by 220 basis points to 5.4% -- in this, the seasonally lightest first quarter. FMS earnings were driven primarily by a stronger Commercial Rental performance and better Used Vehicle results. FMS also realized a gain of $2.4 million on a facility sale and a small benefit due to acquisitions. These improvements were partially offset by higher maintenance costs on an older leased fleet, increased compensation expense and investments in sales and information technology initiatives. On Page 6, turning to Supply Chain Solutions segment, both total and operating revenues were up 36% due to the Total Logistic Control acquisition in December and increased trade volumes. SCS net before tax earnings were up by 72%. Supply Chain's net before tax earnings as a percent of operating revenue increased by 80 basis points to 3.7%. Higher SCS earnings resulted from the TLC acquisition, the improved operating performance and higher volumes. In Dedicated Contract Carriage, total revenue was up by 16%, and operating revenue was up by 15%, reflecting the Scully acquisition and higher fuel costs pass-throughs. DCC's net before tax earnings were unchanged while earnings as a percent of operating revenue were down 80 basis points to 5.8%. The earnings benefits from the Scully acquisition were offset by lower operating performance due to unusually high shutdown costs on closed locations and higher driver expenses. Page 7 highlights key financial statistics for the first quarter. I already discussed our quarterly revenue results, so let me start with EPS. Comparable EPS from continuing operations were $0.51 in the current quarter up by $0.27 or 113% from $0.24 in the prior year. The average number of diluted shares outstanding for the quarter declined by 1.7 million shares to 51 million. During the first quarter, we purchased 250,000 shares at an average price of $47.97 under our 2 million share anti-dilutive program. This program remains active with approximately 1.2 million shares available at quarter end. As of March 31, there were 51.3 million shares outstanding of which 51 million are currently included in the diluted share calculation. The first quarter 2011 tax rate was 40.7%. The tax rate was negatively impacted by $1.2 million due to a tax law change in Illinois. The negative EPS impact from this item of $0.02 was included in both our reported and comparable earnings numbers. The first quarter 2010 tax rate was 42.8%, reflecting nondeductible items on lower relative earnings. I'd like to turn now to Page 8 to discuss some of the key trends we saw during the first quarter in each of the business segments, and some of the key statistics I'll discuss here are also included in the Key Performance Indicators page in the earnings press release tables. On Page 8, in Fleet Management Solutions, Full Service Lease revenue grew 1%. The average lease fleet size declined 2% from the prior year's first quarter, but was up slightly on a sequential basis versus the fourth quarter 2010, reflecting recent acquisitions. Contract maintenance revenue was down 4%. This reflects a 2% reduction in the average fleet count versus the prior year. However, it sequentially stabled with the fourth quarter's fleet count. Lease pricing on new units has been and remains firm as we're focused on realizing appropriate long-term returns for investments made in this contractual product line. Miles driven per vehicle per day on the U.S. lease power units increased over the prior year for the fifth consecutive quarter. Miles per unit were up by 3% versus the first quarter 2010. We realized strong organic growth in Commercial Rental revenue of 34% from the prior year on an 11% larger average fleet. We're continuing to see benefits from improved demand and greater usage of rental trucks due to the higher cost of new vehicles. Given these factors, we rented each vehicle for a greater number of days during the quarter, resulting in higher utilization. Global Commercial Rental utilization on power units was 72.5% up 390 basis points from 68.6% last year. Global pricing on power units was up 12%, accelerating from the 10% increase we saw in the fourth quarter. In Fleet Management, we also saw a stronger unit vehicle result during the quarter, reflecting an improved environment, and I'll discuss those results separately in a few minutes. The trend of higher maintenance costs on our older lease fleet continued during the first quarter. Since customers replaced leased units at a slower-than-normal rate during the past 2 years, the fleet has aged, and therefore our maintenance costs are up. As discussed on our last call, we expect this trend to continue throughout the year. In Supply Chain Solutions, operating revenue was up 36% in the quarter with growth in all 4 industry verticals. The strongest growth was in our newest vertical, retail CPG, due primarily to the TLC acquisition. We also saw a very nice growth in the auto and high-tech sectors mainly due to increased volumes. In Dedicated Contract Carriage, operating revenue grew 15% due to the Scully acquisition and higher fuel costs pass-throughs. Following year-over-year earnings declines in the prior 2 quarters, DCC's earnings were stable this quarter. Earnings benefited from the acquisition, but were negatively impacted by unusually high shutdown costs on closed locations and higher driver expenses resulting from increased use of temporary outside drivers. And at this point, I'll turn the call over to our Chief Financial Officer, Art Garcia, to cover several items beginning with capital expenditures.

Thanks, Greg. Turning to Page 9. First quarter gross capital expenditures totaled almost $450 million, which is up $172 million from the prior year. Spending on lease vehicles was slightly down from the prior year reflecting the timing of vehicle deliveries and increased usage of rental vehicles to fulfill these contracts. We expect lease capital spending to ramp up over the balance of the year. Capital spending on Commercial Rental vehicles was $317 million due to refreshment and growth of the rental fleet. This was an increase of $175 million over the prior year. Our full-year gross capital spending forecast remains on track with previously expected levels of $1.7 billion to $1.8 billion. However, the mix between lease and rental capital may vary depending on the amount of rental equipment used to fulfill new lease contracts. We realized proceeds primarily from sales of revenue earning equipment of $71 million, that's up $22 million from the prior year. The increase reflects higher used vehicle pricing, partially offset by fewer units sold. Including proceeds from sales, net capital expenditures increased by $149 million to $377 million. We also spent $84 million this quarter on acquisitions, primarily related to the purchases of Scully and Carmenita. We expect acquisition holdbacks of $20 million, mainly from these 2 deals to be paid later this year. Turning to the next page. We generated cash from operating activities of $218 million in the quarter, that's down by $54 million from the prior year. The reduction is primarily due to changes in working capital, reflecting increased receivables on higher revenue. We generated a little over $300 million of total cash for the quarter, that's down by $32 million from the prior year. Increased Used Vehicle sales proceeds partially offset the reduction in cash from operations. Cash payments for capital expenditures increased by $113 million to $313 million, reflecting increased rental vehicle purchases. The company had $10 million of negative free cash flow for the quarter, and this is in line with our recent full year forecast. Free cash flow was down $146 million from the prior year's positive free cash flow, due mainly to higher capital spending on vehicles. On Page 11, total obligations of $2.9 billion are up $61 million as compared to year-end 2010. The increased debt level is largely due to higher vehicle capital spending and recent acquisitions. Balance sheet debt-to-equity was 195% as compared to 196% at the end of the prior year. Total obligations as a percent to equity at the end of the quarter were 202%, that's largely unchanged from 203% at the end of the year and below our target range of 250% to 300%. Our equity balance at the end of the quarter was over $1.4 billion, that's up by $36 million versus year end 2010. The equity increase was driven by earnings of $25 million currency translation adjustments of $24 million, partially offset by dividends of $14 million and share repurchases of $12 million. At this point, I'll hand the call back over to Greg to provide an asset management update.

Thank you, Art. Page 13 summarizes key results for our asset management area globally. At the end of the quarter, our global Used Vehicle inventory for sale was 5,000 vehicles, down by 1,800 units from the first quarter 2010. The Used Vehicle inventory is only down 200 units sequentially from the end of the fourth quarter 2010, and remains below our target level. We anticipate that this inventory will grow somewhat as the year progresses, reflecting increased lease expirations and rental vehicle out-servicing. We sold 4,100 vehicles during the quarter, down 13% from the prior year due to our smaller inventory available for sale. However, sales were up 3% sequentially from the fourth quarter. We saw a continued strength in Used Vehicle demand and pricing in the first quarter. Improved demand is a result of both relatively better market conditions and the desire of some truck buyers to obtain pre-2010 engines. Stronger demand combined with less available inventory in the market has allowed us to up price generally and to increase the proportion of retail sales were we realized better prices. Compared to the first quarter 2010, proceeds per vehicle were up 42% on tractors and up 44% on trucks. From a sequential standpoint, tractor pricing was up 9% and truck pricing up 7% versus the fourth quarter 2010. Going forward, we expect continued strong used vehicle pricing in all classes with further improvements primarily in tractors. At the end of the quarter, approximately 7,400 vehicles were classified as no longer earning revenue. This was down by 2,400 units or 24% from the prior year. The decrease reflects fewer vehicles held for sale and better rental utilization. As expected, the number of lease contracts on existing vehicles that were extended beyond their original lease term declined versus last year, although it's still running somewhat above normalized levels. The number of these lease extensions in the U.S. for the quarter was down by almost 400 units or 19% versus the prior year. This decline reflects an increase in new, full-term lease contract sales instead of lease extensions by customers. Early terminations of leased vehicles declined by almost 450 units or 33%. Early terminations were roughly half what they were 2 years ago, and were at the lowest level in at least 6 years. This is a very positive indicator of improved lease demand. Our average global Commercial Rental fleet during the first quarter was up by 11% from the prior-year period and in line with our plan. Finally, let me turn to Page 15 to cover our outlook and forecast. In Fleet Management, we expect organic strength in Commercial Rental and Used Vehicle sales to continue this year. In Full Service Lease, our sales results improved this quarter for both new business and fleet renewals. We remain on track with our prior expectation that the number of leased vehicles on an organic basis will inflect and turn up starting in the second half of the year. Including vehicles from recent acquisitions, we expect that total leased fleet to be higher at year end versus the prior year. In Supply Chain, we anticipate continued benefits from our acquisition and from organic new sales versus the prior year. Earnings will be negatively impacted, however, due to production cuts related to the Japanese disaster primarily with 1 significant automotive customer. Based on currently available information, we anticipate production to be at very low levels in the second quarter, and then ramp up during the second half of the year with this customer. However, this outlook is subject to change as conditions develop. Our forecast includes a $0.04 to $0.05 negative EPS impact in the second quarter and a $0.10 to $0.15 negative impact for the full year from this account. Despite this impact, we're still increasing our full year 2011 comparable EPS forecast from our previous range of $2.80 to $2.90 up to a new range of $2.90 to $3, an increase of $0.10 over our prior forecast. Our new full year EPS forecast range represents a 31% to 35% improvement above last year's comparable EPS of $2.22. We're also providing a second quarter EPS forecast of $0.72 to $0.77 versus the comparable prior-year EPS of $0.58. This represents second quarter EPS improvement of $0.14 to $0.19 or a 24% to 33% increase. And that does conclude our prepared remarks this morning, and we'll move on now to our questions-and-answer time. Due to the number of callers in queue, I'll ask that you limit yourself to 2 or 3 questions each. If you have additional questions, you're welcome to get back in the queue and we'll take as many calls as we can. So at this time, I'll turn it over to the operator to open up the line for questions.

[Operator Instructions] Our first question today is from David Ross with Stifel, Nicolaus.

Can you talk a little bit, I guess, starting off with Supply Chain Solutions, to what the earnings revenue growth would've been excluding TLC? And then also in the 4 segments, you mentioned that they all saw a nice growth, is there 1 that, you know, outperformed the others?

Yes, I think there is a page in the appendix that covers that, but I'll ask -- I'll turn it over to John Williford to comment.

I think it's 12% growth excluding the acquisition in SCS. And I think by segment if you're looking globally by segment, that is -- give me a second here -- in automotive, automotive is 15% year-over-year growth. High-tech is 10% and retail CPG excluded -- retail CPG, you got to add the acquisitions up. I'll give you the raw numbers for retail CPG, it's 104% compared to 42%. Oh, yes, 149%, 149% growth in retail CPG.

Okay. And then on the used truck pricing up 42%, 44% year-over-year and up sequentially from the fourth quarter, how far are we still from the prior peak levels of what you would see as kind of a more normal used truck market or what they have been in the past cycle?

Robert, do you know, or Art, how far we are away from the peak, even with the growth we've had in those prices at 42% 44%, respectively.

I think we're at least 20% below the peak still, I’d say.

So we got a little way to go.

Yes, and that would include that fact you've got some inflation in the vehicle investment, too, so.

And then, Greg, overall, I mean it sounds like a pretty solid quarter -- everything or most things are going in the right direction. But what disappointed you most in the quarter and what are you kind of focus on fixing that you didn't expect?

Well, I would say, as a matter of perspective, nothing truly disappointed me. I think that there are things that happened in the world that you can't control. I think the unfortunate devastation in Japan is a calamity of a human scale and is also business impact. But you know, you deal with the cards that you're dealt and you kind of face that and that's something that's an issue. I think we look for the same thing that many of you look for. And we predicted that by the second half of this year, lease revenue, lease units will actually increase. And as we said in our comments, the sales that have been going on in Fleet Management and the renewals that have been going on in Fleet Management, we think, were on track to deliver what we anticipated would begin to show up in the second half of the year, but we're still waiting to see that. So on a total unit basis, we're up because of the acquisitions -- on the organic basis in those units, they haven't turned yet. But we're on a positive path, we think, to get that by the second half of the year, which was exactly in our plan.

Excellent. Thank you very much.

Your next question is from Kevin Sterling with BB&T Capital Markets. Kevin Sterling - BB&T Capital Markets: Greg, we've heard from some of the large public trucking companies about weakness on the West Coast. As you've expanded your presence out West, did you see any of that weakness?

I would have to say no. I'll turn to Robert, and see if he saw anything from his business segment, but I have not heard that.

No, we're not seeing that. And again I don't know if it's a particular segment you might have heard that from? Kevin Sterling - BB&T Capital Markets: It's the truckload sector.

Yes. No, again the majority of our customers are not in the truckload business, but no, we haven't seen it with our customers. Kevin Sterling - BB&T Capital Markets: And Greg, in your Commercial Rental, I think last quarter you talked about seeing extended rentals such as over the weekend, are you still seeing that trend in Commercial Rental?

I think the fact that utilization is up almost 400 basis points would suggest that customers are holding onto equipment longer than they did in the downturn. And I think that clearly is the case to get that strong a utilization in the first quarter of the year, which is always seasonally the weakest. Kevin Sterling - BB&T Capital Markets: Okay. And you talked about miles driven, being up for the fifth consecutive quarter. Could you comment on your April trends regarding miles driven?

We don't have the numbers yet but generally we expect that the miles per unit to continue to be at the existing levels plus some rising throughout the year. So we expect that to continue be strong. Kevin Sterling - BB&T Capital Markets: Okay. Well, thank you for your time this morning. I appreciate it.

Our next question is from Anthony Gallo with Wells Fargo.

I guess my first question is for John. Did the $0.10 to $0.15 hedge because of the 1 particular customer in Japan -- adding that back because it looks like the underlying profitability at SCS is quite good, am I not looking at that the right way? And if it's quite good, x this 1 customer, what are the 2 or 3 different things that are taking place in there?

Yes, I would say that the profit margins in SCS before this impact that we've been talking about, are at or slightly ahead of what we would have expected and that, that's really been across the board. The TLC acquisition's gone well and that's performed at or slightly ahead of our expectations. And we've seen decent volumes in both auto and high-tech. So all parts of that business other than this 1 impact seemed pretty strong.

Okay. The lease fleet -- changing subjects, the lease fleets that's rolling off, is there anything unique about the composition of the customer base that you think is going to be rolling off for the near term relative to... [Technical Difficulty]

[Operator Instructions]

The lease fleet that's rolling off over the next 6 to 12 months, is there anything unique about the composition of that fleet, either the size of the customer that we need to be paying attention to as you bring new business on?

I think if I understood the question, is there anything different about the lease fleet that's rolling off in the next 12 months in terms of customers or anything like that. No, I think there's nothing unusual about it other than obviously, we're in a year where there's a larger percentage from the high end, if you will, of the 15% to 20% of the fleet that terms out each year. So we have -- we'll have more units terming out than the average but nothing unusual in terms of customer concentration, or anything like that. As you know we have a pretty well diversified customer base.

Okay so it's not like you got an unusual number of small customers coming off and you also have a large percentage coming off, correct?

Yes. No, there's nothing unusual about the size of the customers' fleets or the size of the customers that are terming out.

Okay, great. I'll get back in line. Thank you.

Our next question is from Peter Nesvold with Jefferies. H. Nesvold - Jefferies & Company, Inc.: I don't think you spoke to the spreads in the Leasing business. Can you maybe just quantify what type of spreads are you writing incremental business at right now?

Well, Peter, we don't get into the details of the returns but we are -- I think a way to look at them it is they're consistent with the returns that we have -- that we've written in the past. And we target to be anywhere between 60 and 100 basis points above our cost of capital, so we continue to be in that range. H. Nesvold - Jefferies & Company, Inc.: And in your sales -- internal sales conversations, what kind of color do you get from your customer base about what tips the scale to get the FMS business, the New Lease Origination business, starting to move a little more aggressively?

Peter, I think it's confidence in the economy and the sustainability of the growth in the economy and a rebound in the economy. As customers begin to get more and more comfortable, that's when you start to get a lot more requests. Clearly, as rental rates continue to move up that helps in the decision -making also, but it's -- a lot of it has to do with just overall confidence in the sustainability of the recovery. H. Nesvold - Jefferies & Company, Inc.: And I guess last question, I think historically you might have talked about 80%-type capacity utilization to Commercial Rentals as sort of effectively full utilization. Is that sort of still the number?

Yes, I think if you look at any seasonal periods -- so if we were in peak season in the third quarter, 80% would be full utilization. I think over a year -- a full year period you’re probably looking at something in the high 70s as really full utilization. As you can see in the first quarter, we had a very strong utilization quarter for this time of year and we were still in the low 70s. H. Nesvold - Jefferies & Company, Inc.: Got you. Okay, thank you.

Our next question is from Alex Brand with SunTrust Robinson Humphrey.

Greg, I think you said the specific Q2 impact of Toyota versus the full year number, but I missed it.

$0.04 to $0.05 for the second quarter, $0.10 to $0.15 for the total 3 quarters remaining.

Okay, great. Thank you. Now, Greg, I don't know how -- as I think about your comments about the gradual ramp-up of the FMS business, is there something -- does this feel like a normal sort of gradual ramp or is there a point where we should expect that there's a release from Ryder 1 day that you've got a big order for some trucks for your lease customers or some sort of tipping point in time that we should expect to see?

Your first part, you said, how do we feel about sort of the gradualness of this impact over time, and it has been gradual. I think that from Robert's comments earlier, it's an issue of confidence relative to each customer. Each customer attains their level of confidence in their own business relative to the economic growth and their confidence in their own business at different points. So I think that's what's gradual. The encouraging thing is that we find that there are more units being signed up now and a good renewal rate. If it becomes a floodgate or a surge, we'll know it in the results and you'll hear it from us. But I think that we continue to see progress somewhat modest thus far but continuing to expect to accelerate over time.

All right, and 1 more question, if I could. If I look at your guidance, which is up sort of $0.10 for the year with another $0.10 or $0.15 impact, so kind of underlying $0.20, $0.25 and I think about the waterfall chart you provided at year end, where would that $0.20 to $0.25 come from?

I would say that it would certainly come from Rental. It would come from Used Vehicle sales and maybe better than expected performance on the acquisitions. And a little bit in a few other places but those would be the big 3.

Good. I appreciate the time, guys.

Our next question is from John Barnes with RBC Capital Markets.

First, Greg, you had commented, I guess, last quarter and then I think you just mentioned it again, rental rates, and maybe rental rates moving higher starting to have some positive impact on customers moving over into a Full Service Lease. Can you just talk a little to -- have you started to see any success from that initiative? And if not, does that mean that there's room still to push rental rates higher?

Yes and I'll disconnect a little bit. We don't raise the rental rates just trying to move people in the lease. We move rental rates based on the supply and demand of classes of vehicles and geographies. The fact that rates go up may cause more customers to think about when do they make the decision. So the fact is that with rental rates up 12% this quarter versus 10% last quarter, whether they go up some more -- they might, if demand continues to be heavier than the supply and if there's still freight to move and the economy is in decent shape, that could certainly happen. I think for lease, it will be an issue more of long-term confidence and that's maybe the word of the day, thus far on this subject, is customer confidence. I think the lease units will come from that customer confidence as opposed to just purely higher rental. I'll let Robert comment if you'd like.

Yes. I guess the only things, John, I'd add to that is that rental rates are coming up really from a pretty low bottom that rates went down over the last couple of years as demand softened. So part of this is just getting rates back up to the levels that you need to in order to justify the investments in the fleet. In addition to that, we have the increased investment required for the new EPA 2010 technology that we're having to recapture also. So I think, as Greg articulated, the rates are going up for -- because the rates needs to go up to justify the investment and because of the EPA 2010, a by-product of that or a consequence of that, is that obviously, for customers trying to make a decision on whether to continue renting or leasing, it may accelerate that decision.

Okay. Thanks for that explanation. Also, when you look at maybe some success that you are having on the lease side, are you seeing a mixed shift between maybe there's more customers with a specialty equipment need re-upping now, whereas maybe a customer that has just the need for standard equipment is not really willing to rent in this kind of environment?

No, I don't think there's any movement or proportion moving to specialized equipment. I think that the vast majority of what we lease and are renewing are your standard tractors, your standards straight trucks was -- Robert, is there anything...

No, we are seeing more activity, if you will, around sales during this last quarter across the board. I think there's a lot more customers who are looking for quotes and a lot more customers that are active in the market today than there was, let's say, 3 to 6 months ago.

And Greg, recognizing that the Lease business is a late-cycle business, and we probably are getting close -- you're seeing more activity and you've talked about it as being much of a contributor to the second half of your year than the first half, so I get that. But does this cycle feel even later than the normal cycle and does it go into that whole confidence thing that, that the confidence hasn't rebounded with your customer base nearly as quickly as maybe it has in prior recoveries?

I would say compared to prior recoveries, the rebound is coming out at a much deeper chasm, so that's part of the issue. Many more customers affected in a much deeper way and therefore the willingness to make that next commitment is obviously, being more thoughtfully and time-consuming, conservative. So I would say compared to past downturns, which were not as deep, the recovery was a little more swift. I think because of the depth and the nature of this downturn and its recovery, you have the same thing reflected in longer-term lease commitments. And we still have a long way to go. Look at the housing market, look at current unemployment rates, we still have a long way to go.

All right, very good. Thanks for your time. Congratulations on the quarter.

Our next question is from Jeff Kaufman with Sterne Agee. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Greg, I just want to go back to an earlier question. Did you notice any change in terms of the rental-to-lease conversions, if we look at it geographically. For instance, we've heard that the economy has been a little bit stronger in kind of the farm belt, a little bit weaker on the Coast. When you look at your network geographically, are you seeing any different behaviors?

I'll let Robert comment.

I guess the only comment that I might have on that is that it clearly -- in parts of the country that housing and construction were bigger drivers of the economy, clearly those areas you're not seeing the demand coming back as quickly as some of the other areas. So if you look at parts of the southeast and parts of the southwest, you are seeing in that, those areas coming back slower. But other than that, I think I'm not sure it's a geographic issue more than it is a sector issue. Jeffrey Kauffman - Sterne Agee & Leach Inc.: And then just 1 follow-up, I know that the tax rate was a little bit higher on the Illinois change. What should be thinking about in terms of full year tax rate, are we thinking something in the low 40s or are we thinking something in the middle of 38s.

We had provided guidance at the beginning of the year that our comparable tax rate was, I think, around 38.5%. As we sit here today, we probably are still comfortable with that. We may actually a little bit lower as we finish the year. There is a little bit of seasonality in our tax rate, if you will. So it's typically lower in the back half of the year. But I think overall, right now, we've looked at it probably low – mid- to low-38% for the full year. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Okay, guys. Congratulations, and thank you.

Our next question is from Ed Wolfe with Wolfe Trahan.

Art, can you take us through a little bit on the depreciation side, you've got CapEx rising, you've got used equipment values rising, depreciation is coming down though. How do we think about that, and obviously, the value of the tractor is going up, so when you think about what the usual life and the end value of the tractor, that's going up as well. Can you talk about how we should we look at depreciation going forward with all of these cross turns?

Okay, maybe we can talk first about the first quarter. The first quarter we had, in line of what you're saying, we had a -- in line of positive pricing, we had lower write-downs at our used truck centers. And it's about $7 million less this year than last year. So that's a big driver of why you see depreciation dropping year-over-year. Some of that is, where from a comparability perspective, we've carried a little fleet here for about a year. We're going to start to catch that tail, if you will, to a certain extent. So we don’t really see that benefit continuing as largely going for the balance of the year. So in light of that, with the increasing CapEx, we would expect depreciation to start rising, so that's kind of what we would forecast out, as you start seeing depreciation be higher versus the prior year over the balance of the year. Jeffrey Kauffman - Sterne Agee & Leach Inc.: So $206 million goes towards where -- gradually throughout the year, towards $220 million?

Right, $220 million and up probably over the balance of the -- or the second half when you factor in a large amount of CapEx obviously. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Okay. Second on the acquisition side, I think John Williford said on the Supply Chain, the internal growth would've been about 13%. Can you give us similar numbers for what the different product lines would've been, net of acquisitions? Can you look at Full Service and Rental and Dedicated?

There was much less impact from acquisitions. They're virtually de minimis. So the Commercial Rental, Used Vehicle sales, FMS, that was pretty much organic. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Okay, that's helpful.

Right. And then on the Dedicated side, to add to your point, about 10 points of the revenue growth probably is coming from the Scully acquisition. Remember when we acquired that late in January, so a good chunk of it is coming from there. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Thanks. Okay, and going forward then, it's a little more than that because you didn't quite have it for the whole quarter, is that the way to think about it?

Yes.

And FMS is about 1 percentage point so -- for us mostly. Jeffrey Kauffman - Sterne Agee & Leach Inc.: It’s 1% growth that was added by acquisition?

Right. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Switching gears on Slide 13. Greg, I thought you said right at the end of the slide that -- and I lost track here a little bit, but I think you're saying that vehicles no longer earning revenue were up 3% and that's a very good sign for future leasing. Can you talk to that a little bit? And did I hear that right?

I said for -- let me see, let me go back to those specific words. The early terminations? The early terminations declined by almost 450 units or 33%, and that was roughly half of what they were 2 years ago. So now we're at our lowest levels in at least 6 years. And I said that was a very positive indicator of improved lease demand. Jeffrey Kauffman - Sterne Agee & Leach Inc.: And then the early termination is when, obviously, you sign a five-year lease saying and somebody tries to cancel it earlier?

Or their business may fail, it may be some issue that came from the economy that caused them to go out of business. There was a lot of that going on over the previous couple of years. Jeffrey Kauffman - Sterne Agee & Leach Inc.: And there were a lot of extension as I recall as well. Where are you, in seeing people, instead of renew, extend?

Extensions were down compared to where they were recently but still at a higher-than-normal rate. And if you were able to flip eventually to the appendix, which is on Page 23, you'll see that over the same period, last year we had 2,088 extensions and this year we did 1,701. So that's down from last year but still higher than the norm. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Okay. So what is your read -- if you had to guess when -- I mean, I think there's kind of a chicken or an egg here thing. At some point your economy slows and rental slows and maybe it's 1 of those word sequels where the lease never catches or you would think the lease would start to catch. And it sounds like you're starting to see some early signs of the lease starting to catch, am I reading that right? What's your best guess on that?

I think that's a fair terminology for what's occurred in new sales, new customers and renewals. I would say that lease is starting to catch. Jeffrey Kauffman - Sterne Agee & Leach Inc.: And if -- in your opinion, catching, we would see -- in what? What would revenue look like next if it caught?

Well, I'm not in a position to forecast next year's. We're not going to go out a year out. We'll be able to do that after we see what we expect in the second half of this year. Remember that the bulk of the revenue will impact 2012 more than 2011. So if in fact things do occur as we see and as we predicted and the unit count goes up by the end of the second half of this year, the revenue will go up in 2012 by comparison, but we're not at a point of giving that forecast in the next year yet. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Last 1 -- I'll let someone have it, are you seeing an increase in truckload carriers -- as customer, they've been talking about capacity tighten up quite a bit recently?

Predominantly, no. I think that they consider what they do to be core, and so -- no, not a lot of action there that would be unusual. Jeffrey Kauffman - Sterne Agee & Leach Inc.: Okay. Thanks for the time, I appreciate it.

Our next question is from Art Hatfield with Morgan Keegan. Arthur Hatfield - Morgan Keegan & Company, Inc.: Just a couple of quick ones. Most of my primary questions have been answered, but any concerns about equipment supply going forward as things ramp up? What's your -- quoting to your customers on the potential delivery times, has that changed at all recently?

No, it's -- I was just stretching out a little bit, but we have pretty good terms with our suppliers in terms of slot dates. And we agree to those at the beginning of the year and then are able to fill based on that. Arthur Hatfield - Morgan Keegan & Company, Inc.: Robert, do you think that could actually provide you a competitive advantage as time wears on, if things really start to pick up?

Absolutely. That's something that when things heat up certainly becomes a factor in our customers' decision-making.

It could be a driver to an in acceleration in the Full Service Lease revenue.

Sure. That would be a factor. Arthur Hatfield - Morgan Keegan & Company, Inc.: Sure. Yes, 1 other thing I just want you to touch on. I can't remember your comment on this, but I know through the downturn you talked a lot about after going through the credit crisis we went through, as we come out of that, a lot of the customers that you couldn't touch in the past, because they have their own ability to finance and they were kind of comfortable having that capital on their balance sheet would change as time wore on. Are you seeing signs of that and are you seeing the pool of potential new customers grow to any significant degree?

Really this first quarter is when we've really begun to see more activity in general, in sales. And certainly some of that is due to the fact that you got folks who historically maybe have purchased -- they're now looking at leasing as an alternative. And I don't have any statistics on the details of why they're looking, but certainly there's some anecdotal evidence out there that some of these folks are doing it or doing that as a way of helping them finance their fleet. Arthur Hatfield - Morgan Keegan & Company, Inc.: Great. That's all I have for today. Thanks for your time.

Our next question is from Matt Brooklier with Piper Jaffray.

So in your prepared remarks in the release you cited that you're adding to your sales headcount. Maybe talk a little bit to that in terms of your adding to the sales force because of kind of current near-term demand being stronger on the Commercial Rental side or you're just trying to get ahead of, I guess, potential demand curve on the Lease side, maybe just provide a little bit more detail?

Yes, it's really primarily on the Lease side. Certainly, as we look out over the next few years, as we said before there's more units terming out and needing to be replaced in the next couple of years than average. In addition to that, we know that the general truck population in the marketplace has aged and there's probably more opportunity to capture market share than there has been in other years. So we've made some investments in adding headcounts for our Lease sales. We've also initiated some activities around inside sales so we're building up a group to do some inside sales, which we're thinking also provides some longer-term benefits.

And those heads are in place or you're phasing those heads in now, how should we think about that?

As of the end of the first quarter, the majority of the additional sales people are in place, they were really ramping during the quarter. And then inside sales will continue to evolve over the next several quarters.

Okay. Fuel in the quarter obviously is spiking up. We know that Ryder typically holds a -- kind of a fixed margin, if you will -- what was the fuel impact from a margin basis year-over-year during first quarter?

Yes, the margin impact was not significant really, Matt, as you...

Was it kind of flattish? Was it a benefit? Was it a negative?

Flattish.

Flattish, okay. And then I think a couple of years back, there's the -- and then previous quarters you had seen a little bit of benefit but that doesn't sound like it was the case this quarter. Last question, your guidance being raised a portion of that is the strength at Commercial Rental -- you're getting better utilization, you're getting better price, how should we think about volume and the overall fleet? Is it time to start maybe pushing a little bit harder and adding more vehicles to the rental fleet versus what you were thinking about 3 months ago, maybe talk to that.

No, Matt, we're not there yet. As of the end of the first quarter, about 55% of our incremental rental purchases -- or actually not our incremental -- our rental purchase had hit the ground. So we still have quite a few units that will be coming in, in the second quarter and certainly we're looking forward to those units hitting the ground and beginning to be utilized. So we're watching it closely but we certainly are not at a point to say that we're going to add any more units beyond that.

Okay, so there's no change in your kind of the thought process on what the rental fleet looks like at the end of '11?

No, the only play we have is if we may hang on to some units a little bit longer that we would have gotten out of earlier in the year. That's the only play that -- or level we are considering now as we look at demand.

Okay. Thanks for the time.

Our next question is from George Pickral with Stephens.

Greg, you're talking about increasing demand for Used sales, for Rental and now you're talking about maybe your Lease, I think you said, is catching. Does that imply that maybe the Rental side could be re-leasing, if you will, that people are going to give up their short-term rental and move in to the lease? Or do you think that all 3 are kind of full steam ahead from here?

Well, I think all 3 can be strong and growing simultaneously because we still got a lot of catch up to do compared to the freight volumes that we were moving just a couple of years ago. So since this was a long multi-year and deep downturn, I think it's going to be a long multi-year upturn. And for that reason, when you had previously all those factors going down you certainly can have all factors going up. They may not all be increasing at the same rate or at a stronger rate as in the recent past, like Rental, but yes, they can be all growing. And in fact, the fundamental is that our rental fleet should be a fairly consistent proportion of the lease fleet because the rental units are there to also fulfill our promise, and our value proposition to our lease customers and it's not just for occasional renters.

Got you. And then along those same lines given the rise of fuel over the past couple of months, given the rise of used vehicle prices and rental rates, are you getting any pushback at all from customers on pricing or not?

Not from customers who have freight to move.

Sounds good. And then last question, any thought you could or any color you could give on a potential, I guess, positive or negative impact that a rising interest rate environment could have on your core Leasing business?

Yes, based on our percentage of variable rate debt on our portfolio -- I guess we use a rule of thumb, if you take a 1% change in interest rates that would increase our expense annually about $7 million. So that's kind of the rough cut way to do it.

Okay, great. Thanks for the time, guys.

Our next question is from Ben Hartford with Baird.

I was hoping if you could provide a little more detail on the better-than-expected performance among the acquisitions, whether it was concentrated in 1 deal or another? And, really, what drove that better-than-expected performance here year-to-date?

It's probably a combination of factors. 1 was we did just have better, better operating performance on the accounts than what we have planned. Also the integration costs associated -- this would be around, really, the Scully acquisition came in lower than we thought. And then our net financing costs probably a little bit less than we had planned. So if you look at it, it's all 3 of those and then the split is probably 50-50 between both businesses -- I mean, both acquisitions.

Okay, good. And then if we can look at DCC and margins in that segment, volume or revenue is rebounding nicely and kind of nearing mid-2005 levels so we're still 200 basis points or so off of that 8% operating revenue target that you have highlighted in the past. What is needed to get -- to drive margins back to those levels given some of the volume improvement that we've seen in that segment?

John?

Yes. We pointed out 2 factors that were causing the reduction in margins, one is driver costs and that impact probably peaked in August and September and has been gradually declining since then. It still was a -- maybe a 0.4 impact in the first quarter, and so -- and we expect that we'll be able to -- unless something unusual happens, that impact will be gone by the -- either at the end of the second quarter or certainly by the third quarter. And then the other impact was there were some closed locations, both some -- a couple of lost customers and then some locations where existing customers changed their network, and we had costs for moving around. And same thing, we expect that to kind of disappear. So we should be back in the margin range that we've been talking about, which is the 6% to 7% of operating revenue for DCC for the rest of the year.

Okay, for 2011 and beyond, do you think that the levels that you realized in those 7% or 8% are more -- are still attainable in that segment?

Well, I think we can do better than the 6% to 7% -- I'd rather not say exactly what that's going to be and get into 2012 and beyond. But yes, I definitely see us bringing the margin up directionally from the 6% to 7% that we're talking about for the rest of this year.

Okay, great. Thank you.

And our final question today is from David Campbell with Thompson Davis & Company. David Campbell - Thompson Davis & Co: I wanted to ask about the weather -- is there any weather impact or adverse impact from the auto production loss in the first quarter?

No, we really had no comment nor feel that there was any significant impact on weather. We think weather happens every year, winter comes every year and did again this year and we don't really talk much about it. It's just something that occurs, no specific impact. If you were talking about the tsunami in Japan, no material impact in the first quarter but we have forecasted a $0.10 to $0.15 impact on EPS for the last 3 quarters of this year. David Campbell - Thompson Davis & Co: Right. And as far as the tsunami effect and the auto production loss in the second quarter, why wouldn't that be offset by increased production in the last 6 months of the year? That is, the $0.04 to $0.05 negative impact you're estimating in the quarter, why wouldn't that be offset by higher production in the last 6 months?

It's possible but the communication has been unclear as to the level of ramp- up. We've commented and from what we've been led to believe, there can be a ramp-up production later in the year but it's hard to tell how that will be spread around the world. And before we got too optimistic, we're going to maintain some conservatism in our forecast. David Campbell - Thompson Davis & Co: And you're assuming there's be another -- at least 5% -- $0.05 impact in the, I suppose, the third quarter from the auto production.

Well, if you deduct the $0.04 to $0.05 from the second quarter in the last 2 quarters of the year, we're looking at $0.06 to $0.10 in total. So a $0.03 to $0.05 each quarter. David Campbell - Thompson Davis & Co: Okay. Thank you.

And this concludes the question-and-answer session. I'd like to turn the call over to Mr. Greg Swienton for closing remarks.

We'll, thank you for everyone for joining the call. We're a little over time, we think we got everybody in with at least 1 question. If you've got further follow-up, you can get together -- give Bob Brunn a call in Investor Relations. And thanks for being with us. Have a good safe day.

Thank you. This concludes today's conference. Thank you for participating. You may disconnect at this time.